How the Velocis Gamble Has Paid OffMay 7, 2015
After spending years building fortunes for other private and institutional commercial real estate investors, four top industry players in the Dallas market got together in 2010 to see what they could build for themselves.
Fred Hamm had been an executive at Keystone Group, a private wealth management firm. Mike Lewis was managing director at Crescent Real Estate. Paul Smith was chief operating officer of Brook Partners, heading up advisory and asset management services. And Jim Yoder was managing director of JLL’s investor services group.
A fifth colleague, David Seifert, was promoted to principal in 2014. Before joining Velocis as an associate in 2010, he had worked in the acquisitions group of L&B Realty Advisors, a $6 billion real estate investment manager.
Velocis targets financially distressed or undermanaged assets in the $15 million to $70 million range. Five years later, the partners’ risk has been rewarded. Velocis’ first $150 million fund, which closed in March 2013, has exceeded expectations, the partners say. (For example, one Fund I property, 3131 McKinney, which Velocis sold late last year after acquiring it in May 2013, generated an internal rate of return of more than 36 percent.) The success of Fund I led to the launch of a second fund last June, with a targeted capital raise of $300 million. Velocis currently has $448.2 million in assets under management.
We recently sat down with two of the company’s principals, Hamm and Lewis, to get an update on activity.
D CEO: What led to the launch of Velocis?
FRED HAMM: Post-2008, with the repricing of real estate, we thought that—although it would be a challenging time to launch a new fund in the Great Recession—we recognized the opportunity. So we all quit our very significant jobs and came together.
D CEO: Had you all worked together before? How did you partner up?
HAMM: Well, we’ve known each other our entire adult lives, socially and professionally. We all went to the University of Texas, we belong to the same country club, and are members of Dallas Salesmanship Club. We’ve just had so many interactions with each other, respected one another, and admired what we each had done in our respective careers.
MIKE LEWIS: Our discussions really started in 2008. We began formulating a plan prior to our launch in 2010.
D CEO: How did you figure out who was going to play which role?
HAMM: I think that’s what has made us so successful—we all have different skill sets. We liken this to a baseball team, where there are nine positions, and it’s important that all nine players are on the field doing what they do.
LEWIS: Even though our skills are different, we’re all philosophically aligned. That foundation has been critical to our success. When we launched, one of the things we did was all agree to look at the fund from an investor’s point of view, because we’re investors as well. You get farther, faster when you’re all rowing in the same direction. It also makes it a lot more fun.
HAMM: We trust each other, and we’re aligned. But we also challenge one another. We have very healthy partnership discussions. There aren’t any “yes men” in this group. You can be aligned and still have different views.
D CEO: It seems like 2010 was a risky time to start a new venture.
HAMM: It was a huge risk. We launched in February of 2010, and we didn’t have a first closing for Fund I until July of 2011. So, it was an 18-month slog to get us to our first closing.
LEWIS: When we launched, there were plenty of people—especially coming out of the positions we came out of—who questioned why we would take the risk. Some may have even snickered.
D CEO: What was happening during those first 18 months?
HAMM: In the fund business, you’re wearing a lot of hats. You’re raising capital, you’re deploying capital, you’re managing your portfolio, and doing them all simultaneously. That being said, you’re not doing anything until you’ve raised the capital. So raising capital is step one. Raising more capital is step two. And deploying it effectively is step three. … We raised, frankly, a lot more than what we thought we would. The target was $150 million, and we raised $141 million, in a very difficult time.
D CEO: Did it help that the partners were also investors?
HAMM: Absolutely. We have significant skin in the game. We have a large percentage of the total capital in both Fund I and Fund II.
LEWIS: That is precisely why, when we built it, we did so from an investor’s point of view.
D CEO: What was your first acquisition?
LEWIS: The Jefferson, a medical office building in Austin. We actually bought it prior to our first close, which helped us raise more money. Then we started layering acquisitions on top of that.
D CEO: What’s your target?
LEWIS: We target medical, office, and retail. We look for good real estate that’s broken in some way, either financially or poorly managed, where there’s a value-add opportunity. We initially looked in Texas, Colorado, Georgia, Florida, the Carolinas, and the greater Washington, D.C., area. We were successful in buying in all of those, except D.C. We’ve since added Phoenix. We all have extensive backgrounds in those markets, with key relationships there. And we like those markets because they are high-growth and have good demographics.
HAMM: In terms of pricing, we target properties with a range of $15 million to $70 million.
D CEO: How does North Texas fit into things?
LEWIS: It’s certainly one of our primary focuses. We’ve had assets here and have assets here. We love the long-term prospects for Dallas-Fort Worth. The job growth here is among the best in the country, and there’s nothing to indicate that things are going to change anytime soon.
D CEO: Where do things stand with Fund I?
HAMM: We purchased 16 assets: eight office, four medical-office, and four retail. We are 92 percent deployed. We might do one more small deal in Fund I, but for the most part, we are fully deployed. We have sold four of those deals, and we have exceeded expectations on all four. We have another two to four assets that we’ve identified to sell in the early part of this year. We expect to be wound down in Fund I in 2016 or 2017.
D CEO: What has been the buyer appetite, as you take some of these assets to market?
LEWIS: The buyer interest has also exceeded expectations. I take it back to what we target as properties, and those are buildings with a value-add opportunity. We have the relationships to get to those properties, but we’re also very active managers. That’s what we do and have done for years. We like to take those properties and fix them to where they’re more on the level of a core-type property. When you do that, the buyer pool widens. Going in, it may be a private equity-type purchase. When we sell, 50 percent of the interest is coming from institutional investors.
D CEO: How are things going with Fund II?
HAMM: In this current fund, our target raise is $300 million of equity; we’re about a third of the way there. The makeup of that is high-net-worth investors, family offices, and institutions. Our posted minimum is $500,000, but our average investor is significantly above that. Our first deal is under contract—an office building in Scottsdale, Arizona.
D CEO: We talked about what it’s like out there as a seller. What’s it like as a buyer?
HAMM: It’s challenging. Everyone is talking about how frothy the market is. We concur with that, but we strongly believe there are opportunities in every cycle. We have deep relationships across all of these markets. We’re on a lot of airplanes, we’re working relationships, we’ve got boots on the ground. We’re focused on off-market deals.
LEWIS: I don’t care what kind of market it is, you can find opportunities. Three of our best assets to date, we bought in frothy markets in late 2013.
D CEO: What has surprised you most, since launching Velocis five years ago?
LEWIS: Taking constraints off and letting the athlete run—that, I have really loved. There’s nothing holding us back—no Wall Street or anything like that.
HAMM: It has been extremely rewarding to take a concept, come together, and watch it develop into a successful platform—taking the first fund from $150 million in equity to $300 million in the second fund and doubling the size of the portfolio. I think that’s our sweet spot in terms of what this team can effectively raise and manage. The partners all agreed early on to keep the shop boutique-like. We are proud of what we’ve built and don’t want to lose that by scaling up.
LEWIS: We want to stay boutique, even though we manage institutionally.
HAMM: We work hard, but we enjoy the challenge, and we don’t really think of this as work.
LEWIS: I feel like the hours I put in prior to Velocis were just building up to this opportunity.
HAMM: Exactly. We’ve spent our whole careers preparing for this.